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If you look at the numbers their cash over the past few years have been relatively stable about ~24 billion in FCF. Now if we model that as a Perpetuity with 10

If you look at the numbers their cash over the past few years have been relatively stable about ~24 billion in FCF. Now if we model that as a Perpetuity with 10% rate which has been historical rate of the market we get 24/.1=240 (not including inflation) if we add Net Tang Assets and some tax benefits if we write down goodwill we we end up with 56billion. However MSFT is trading for 450 billion. Where is this extra 150 billion coming from? Cloud has about 10% margin I don't see how the numbers add up.

fanzhang 10y ago
In this era of low interest rates, you might model the above with a 7% rate instead of 10%, and then you get closer.
- samfisher83 10y ago
  You don't use interest rates you use a discount rate. Basically what you can earn with that money if you invest in the market.
  - dharmon 10y ago
    He's saying that in this low interest rate environment investors are not demanding 10%, but would rather be happy with something like 7 or 8% as their hurdle rate. In finance speak, MSFT's cost of capital is dependent on the risk-free rate, usually the 10-year US treasury, which is incredibly low right now, thus moving MSFT's cost of capital (the 0.1 in your denominator) lower. A quick search tells me that their cost of capital is currently around 7%. Also, you can't add assets in, since operating assets are required to generate that FCF. You can add in cash, though, which is pretty substantial for MSFT.
    - samfisher83 10y ago
      If you are evaluating a project from the MSFT perspective you might want to use their cost of capital, but as an investor if I can go get 10% why would I want to use 7% as my rate? In any case lets use your 7% you end up with 400bill which is still 50billion less than what it is trading at.
      - smallnamespace 10y ago
        Where can you get a 10% annual return perpetuity? Lending and borrowing rates are closely tied together since they're literally just two sides of the same market. Global long term rates have been slowly trending lower for the last few years.
        samfisher83 10y ago
        http://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp http://www.investopedia.com/ask/answers/042415/what-average-... Over a long period of time that is what the market has returned. It is not guaranteed.One year it might be down 50% one year it might be 50%, but if you look at 30years S&P has returned about 7.5%. 10% is a just a round number makes math easier. You can plug in a different number my point its hard to get to 450 billion.
        deleted 10y ago
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        Retric 10y ago
        The S&P only had 500 companies starting in 1957 using that as the start date you get: 6.170%. S&P has returned ~6.5% over the long term in inflation adjusted returns. However, the trend has been lower returns over time and inflation is currently very low. https://dqydj.com/sp-500-return-calculator/ https://dqydj.com/sp-500-return-calculator/ (You can look at the methodology, but they project further into the past.) 6.736% : 1871 to now 6.525% : 1900 to now 6.281% : 1930 to now 5.977% : 1960 to now Further, there is a lot of volatility in these numbers consider: 7.446% : 1990 to now 2.352% : 2000 to now PS Stable companies reasonably have a premium associated with that stability.
        samfisher83 10y ago
        Ok I plugged in sept 1986 - sept 2016 Here are the numbers I got: Annualized S&P 500 Return: 7.656% Annualized S&P 500 Return (Dividends Reinvested): 10.047% I didn't use CPI. If you want to invest into MSFT at this price be my guest. I believe it is overvalued at this level with such limited growth.
epa 10y ago
Your difference is known as off-balance sheet intangible assets. This represents Microsoft's employee capital, and how the group of individuals are able to produce future revenue generation. How do you value having a group of the smartest people in a field working for you to make money?
deleted 10y ago
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petra 10y ago
Where do you get the 10% margin for the cloud ? Even simple Iaas is better than that , and the services on top have much better margin.
sfaf 10y ago
10% is not the normal discount rate for most people. I don't know what assets you are buying into but most assume a 5-7% discount rate because thats what most expect the long term growth of a diversified portfolio of stocks and bonds.
visarga 10y ago
> Where is this extra 150 billion coming from? That's emotion, specifically, market greed.

fanzhang 10y ago

In this era of low interest rates, you might model the above with a 7% rate instead of 10%, and then you get closer.

samfisher83 10y ago
You don't use interest rates you use a discount rate. Basically what you can earn with that money if you invest in the market.
- dharmon 10y ago
  He's saying that in this low interest rate environment investors are not demanding 10%, but would rather be happy with something like 7 or 8% as their hurdle rate. In finance speak, MSFT's cost of capital is dependent on the risk-free rate, usually the 10-year US treasury, which is incredibly low right now, thus moving MSFT's cost of capital (the 0.1 in your denominator) lower. A quick search tells me that their cost of capital is currently around 7%. Also, you can't add assets in, since operating assets are required to generate that FCF. You can add in cash, though, which is pretty substantial for MSFT.
  - samfisher83 10y ago
    If you are evaluating a project from the MSFT perspective you might want to use their cost of capital, but as an investor if I can go get 10% why would I want to use 7% as my rate? In any case lets use your 7% you end up with 400bill which is still 50billion less than what it is trading at.
    - smallnamespace 10y ago
      Where can you get a 10% annual return perpetuity? Lending and borrowing rates are closely tied together since they're literally just two sides of the same market. Global long term rates have been slowly trending lower for the last few years.
      - samfisher83 10y ago
        http://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp http://www.investopedia.com/ask/answers/042415/what-average-... Over a long period of time that is what the market has returned. It is not guaranteed.One year it might be down 50% one year it might be 50%, but if you look at 30years S&P has returned about 7.5%. 10% is a just a round number makes math easier. You can plug in a different number my point its hard to get to 450 billion.
        deleted 10y ago
        [deleted]
        Retric 10y ago
        The S&P only had 500 companies starting in 1957 using that as the start date you get: 6.170%. S&P has returned ~6.5% over the long term in inflation adjusted returns. However, the trend has been lower returns over time and inflation is currently very low. https://dqydj.com/sp-500-return-calculator/ https://dqydj.com/sp-500-return-calculator/ (You can look at the methodology, but they project further into the past.) 6.736% : 1871 to now 6.525% : 1900 to now 6.281% : 1930 to now 5.977% : 1960 to now Further, there is a lot of volatility in these numbers consider: 7.446% : 1990 to now 2.352% : 2000 to now PS Stable companies reasonably have a premium associated with that stability.
        samfisher83 10y ago
        Ok I plugged in sept 1986 - sept 2016 Here are the numbers I got: Annualized S&P 500 Return: 7.656% Annualized S&P 500 Return (Dividends Reinvested): 10.047% I didn't use CPI. If you want to invest into MSFT at this price be my guest. I believe it is overvalued at this level with such limited growth.

epa 10y ago

Your difference is known as off-balance sheet intangible assets. This represents Microsoft's employee capital, and how the group of individuals are able to produce future revenue generation. How do you value having a group of the smartest people in a field working for you to make money?

deleted 10y ago

[deleted]

petra 10y ago

Where do you get the 10% margin for the cloud ? Even simple Iaas is better than that , and the services on top have much better margin.

sfaf 10y ago

10% is not the normal discount rate for most people. I don't know what assets you are buying into but most assume a 5-7% discount rate because thats what most expect the long term growth of a diversified portfolio of stocks and bonds.

visarga 10y ago

> Where is this extra 150 billion coming from? That's emotion, specifically, market greed.